Production in advance versus production to order: Equilibrium and social surplus

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Abstract

The mixed-strategy equilibrium of the production-in-advance type capacity-constrained Bertrand– Edgeworth duopoly game has not been derived analytically for the case of intermediate capacities in the literature. As in the case of the production-to-order version of the same game, the case of intermediate capacities turned out to be the most difficult one compared with the cases of small and large capacities. In this paper we derive analytically a symmetric mixed-strategy equilibrium of the production-in-advance version of this game for a large region of intermediate capacities. Nevertheless we show that in general the economic surplus within the production-to-order type environment is higher than in the respective production-in-advance type one, and, therefore, production-to-order should be preferred to production-in-advance if the mode of production can be influenced by the government.